hedgeroll

My favorite way to generate investment ideas is reviewing Form 13F filings from great healthcare investors. I first read of this approach years ago in Mebane Faber's book.

If searching for investment ideas is like looking for a needle in a haystack, then 13F filings are a stack of needles.

I later found out the great Mohnish Pabrai also uses filings for idea generation.

I've backtested the filings of 60+ healthcare focused investors, and I have ten that are worth following. These include the well known Perceptive Advisors, and Baker Bros Advisors, but also more under- the-radar firms such as Broadfin Capital. It is important that 13Fs are the beginning of an investment research process. Due diligence is still critical.

Some of my most successful biotechnology stock picks generated by 13Fs have been in the oncology space. An example would be when I bought Pharmacyclics (PCYC) at $19 in February 2012, and held it for a multibagger.

The most recent set of 13Fs were as of September 30, 2014. Here are the two most popular oncology stocks held by my group of hedge funds.

Pharmacyclics (PCYC): A long time favorite of Baker Bros., also owned by Perceptive and BB Biotech, as of September 30, 2014. Ibruvica is currently approved for Mantle cell lymphoma (MCL) and Chronic lymphocytic leukemia (CLL) patients who have received at least one prior treatment.

PCYC is in growth mode, after having Ibruvica approved, the company swung into profitability during the 3rd Quarter of 2014. Analysts expect 37% year over year revenue growth in 2015.

At the upcoming ASH conference the company will be presenting data in the effort to get indication expansion into B-Cell Lymphoma.

Investors are clearly very excited about the growth story here, as the stock currently trades at 11x next years estimated revenue. The bear case revolves around next generation competitors to Ibruvica.

The stock does appears to be near full value, as analyst average price target is $161, which is only 16% higher than current prices.

Celgene (CELG): Owned by RA Capital, Orbimed, BB Biotech, and Perceptive as of September 30, 2013. Celgene is a major player in the oncology space and has products approved for many indications. Revlimid represents 66% of Celgene's revenue. It is approved for Multiple myeloma (MM), myelodysplastic syndromes (MDS), and Mantle cell lymphoma (MCL). Furthermore, there will be many presentations at ASH 2014.

It is worth noting this company has a less concentrated product portfolio than PCYC, with a single product on the market.

Analyst are expecting very strong growth from CELG specifically from their Revlimid, and Abraxane franchises. Celgene's IR site tracks analyst estimates, and it states that EPS growth of 32% is expected in 2015.

CELG investors have been impressed with the growth story. The company trades as 9.7x forward sales estimates, and 25x forward EPS estimates. These valuations could be justified if the firm can pull off its growth plans without any miss-steps.

No value investor would call this either PCYC or CELG "cheap".

Most analyst would not call CELG cheap either. The current analyst price target is $116, which is about where the stock trades now. Investors would be wise to wait for a pull back, or wait for analyst upgrades.

Disclosure: I own none of the stocks mentioned in these articles and have no plans on buying them in the next 48 hour

The MIT Quant, and head of AlphaSimplex Group proposes a fund to invest in biotechnology cures for cancer.

The source article is here and Mr. Lo's proposal is here.Born in Hong Kong and raised in New York City, Lo lost his mother last year to lung cancer. He, like many people, also has watched friends and colleagues struggle with the disease in its various forms. As an economist, he said, “I felt pretty helpless.’’ So he decided to focus on an area where he could have an impact: funding sources for cancer research. In his Nature Biotechnology paper, Lo calls the current business model for drug research and development flawed, noting that the number of drug applications per dollar of spending is declining, and pharmaceutical stocks as a group have fared poorly over the past decade. Under Lo’s proposal, the oncology fund could pour money into more speculative, early-stage research in exchange for a percentage of future royalties or proceeds from sales of intellectual property. A successful cancer drug can generate $2 billion a year in revenue, he said.